S&P: Rating Assigned To Gatwick Funding's Asset-Backed Notes Series 2016/1; Ratings On Outstanding Notes Affirmed
GFL onlent the proceeds of the new notes to Gatwick Airport Ltd. (Gatwick Airport), the borrower under the securitization. Gatwick Airport will, in turn, use the majority of the proceeds to redeem the amounts it has drawn from its bank facilities. The remainder will be used to fund business operating requirements.
The series 2016/1 notes have an annual fixed coupon of 2.625%, a scheduled redemption maturity in 2046 and, in line with the other rated senior bonds issued by GFL, a legal maturity two years after that. The borrower's failure to repay the full principal due on a loan's scheduled redemption date would trigger a loan event of default under the issuer-borrower loan, but not an event of default on the corresponding notes.
What distinguishes GFL from other corporate securitizations that we rate is the presence of refinancing risk. As a consequence, our analysis is anchored on Gatwick Airport's underlying credit quality, which currently reflects our assessment of its business risk profile as strong and its leverage as high.
GFL's financial documentation features structural enhancements that we continue to deem effective in reducing the default risk of GFL's rated notes and preserving value for the benefit of the noteholders at a time of distress for Gatwick Airport.
Particular structural enhancements we take into account include trigger and default events based upon net debt to transfer regulatory asset base (RAB) and senior interest coverage ratio, a hedging policy, and restrictions on permitted disposals, acquisitions, and businesses. In addition, we view the combination of loan events of default that allow noteholders to take control of the business ahead of an insolvency of Gatwick Airport, the two-year tail period on the notes, and an effective liquidity facility as critical to ensure the repayment of the notes in accordance with their terms. We assess the structural enhancement by applying our criteria "Methodology For Considering Pre-Insolvency Structural Protections In Europe," published Dec. 13, 2012, and consider that it allow us to rate the notes above the borrower. In addition, on the basis of such enhancements, the rating on the notes is eligible for uplift above the underlying credit quality of Gatwick Airport on which we base our analysis.
BUSINESS RISK PROFILE
We continue to assess Gatwick Airport's business risk profile as strong, reflecting the following strengths:
Scale, Scope, And DiversificationGatwick shows some concentration on low-cost carriers, and although these are more exposed to downturns because they serve price-sensitive customers, some cheaper airlines such as easyJet are starting to compete in the business segment as well. We believe potential defaulted airlines or missed slots could be easily replaced, as happened in 2013 when easyJet acquired flybe slots. British Airways, Norwegian and Westjet are opening new routes to the EU, U. S., and Canada, and Emirates is planning on increasing its rotation of aircraft. The 52%-48% split between aeronautical and non-aeronautical revenues is a typical mix. Gatwick serves about 220 destinations, similar to Heathrow (about 184). Competitive Position The quality of the catchment area, underpinned by good transport links, provides long-term support for Gatwick Airport's competitive position. We especially note the relatively high average income per capita in the counties with easy access to the airport. Medium-term competitive pressures are limited due to capacity constraints at airports in the southeast of England. Gatwick Airport's pax volume (the number of passengers) makes it the second-largest airport in London (about 26% market share) after Heathrow, representing a strong competitive advantage. In our view, Gatwick provides an essential service to the national economy. It serves a large area with 14.8 million people located within a 60 minute commute. Competition from other transportation links is limited as rail services only serve destinations close to the U. K. The real competition is with other London airports. Heathrow has almost twice the pax volume and more long-haul flights, with consistent transfer traffic. However, we typically see origin and destination traffic as less volatile and providing higher commercial revenues, which partially offsets Gatwick Airport's smaller size. In addition, the airport has started to serve more long-haul destinations. ProfitabilityAeronautical revenues are diversified in terms of airlines and destinations, with low exposure to any single airline compared with European peers. The regulatory framework in place since 2014 is transparent and predictable, and it allows significant flexibility in setting charges and delivering capital expenditure. The yield per pax is currently forecast for 2016/17 to be 8.2% below the regulated price set in Gatwick's commitments, giving it headroom to increase if needed. Additional headroom is afforded by the fact that the "commitments price" is only an average that Gatwick should not exceed over the seven-year regulatory period. In any given year, the price can vary, and Gatwick could respond to a shock by increasing prices by up to 10%. Finally, with the current yield at ?8.58/pax, Gatwick is very competitively priced compared to other European airports, where the average is ?12-?13/pax. Minimum required capital expenditure (capex) in an average of ?100 million per year over the seven-year period in order to achieve the total of ?700 million required under its commitments. The airport's actual capex plan is much higher, so it has significant headroom for reduction if needed. The management team is experienced and is focused on optimizing costs and enhancing traffic and non-aeronautical revenues. The above factors are mitigated by the following weaknesses, in our view:Gatwick's focus on short-haul service, which comprises three-quarters of destinations, is its main weakness. Gatwick Airport is more exposed to leisure travel and the general U. K. economic environment than any of the major European hubs, including Heathrow. Gatwick Airport is mainly a point-to-point airport, and therefore would receive limited benefit from a potential increase in transfer traffic to offset declining local demand. OPERATING PERFORMANCE Gatwick Airport is the second largest airport in the UK, the tenth largest by passenger number in Europe, and the busiest single-track airport in the world (with 40.8 million passenger in the fiscal year ended March 31, 2016, representing about a quarter of London area passengers). About 90% of its passengers use Gatwick as a "point to point" airport. About half of these are "leisure" passengers, one-third from "visiting family and friends" passengers, and the remaining from business travellers.
Traffic Key Performance Indicators Air Transport Movements (ATMs) improved by 4.0% to 266,000 from 255,800. Pax growth was driven by more movements, larger aircraft, and a higher load factor.
With the seats per ATM increasing 0.72% between 2014/15 and 2015/16 (to 181.4 from 180.1) and load factors also improving by 0.72% (to 84.5% from 83.9%), total pax increased 5.5% to 40.8 million in 2015/16 from 38.7 million in 2014/15.
Gatwick's management believes that pax volume for 2016/17 will grow to 43 million and be unaffected by the Brexit vote, any currency weakness, or lower consumer confidence. These expectations are supported by record passengers per slot bookings numbers in July and August 2016 that are ahead of management's forecast; the new larger aircraft employed by airlines for the winter season; and growth in long-haul destinations to 50.
In addition, Gatwick's 2015/16 performance beat our base-case expectations. Revenue increased by 5.5%, EBITDA (pre-exceptional items) increased by 9.7%, reported costs per passenger fell by 4.1%, the EBITDA margin increased to 49.1% from 47.2% and our estimated adjusted FFO to debt rose to 13.1%.
Aeronautical RevenuesGatwick Airport charges its airlines a per-passenger cost and, in addition, for runaway landing and aircraft parking. Such forms of revenues are a function of passenger traffic and are the most likely to be susceptible to recessionary pressures. In addition, aeronautical revenues are also linked to inflation. Under the regulation, the tariffs charged may increase according to a formula linked to the retail price index.
In 2015/16, aeronautical revenues grew by 5.4% on the back of a 5.8% increase in departing passengers and an increase in the level of airport charges, which was offset by discounts and traffic mix (of plane capacities that impact the revenues from ATMs) changes.
Commercial RevenuesGatwick Airport also generates income from services such as retail, car park, and properties. This source of revenues is correlated with passenger flows and moves in line with inflation. Retail income increased by 2.3% (to ?152.5 million from ?149.1 million) but net income per passenger decreased by 3.7% due to soft duty-free trading. Car parking income increased 7.6% (to ?77.9 million from ?72.4 million) with net income per passenger up by 7.3% due to improved yield management. Other income increased 9.7% (to ?91.9 million from ?83.8 million) due to a revised pricing structure for operational facilities services, allowing for recovery of increased operating costs and additional logistics income. Operating Costs In 2015/16, operating expenses (opex) increased by 1.1%, less than the 5.5% increase in revenues. Labor costs, which constitute about 43% of opex, were up by 4.2%, while general and other costs dropped by 2.8% due to reduction in marketing and consultancy costs. Rates and utilities increased by 2.4%.
The EBITDA margin increased to 50.1%, which is at the higher end of what we consider average in the transportation infrastructure sector. The company invested ?220.1 million in capex, and increased its planned spending in the next two years to achieve some efficiencies that would increase capacity. The management is planning to bring forward to 2019-2020 investment in the hold baggage screening system, resulting in estimated capex for the five years between 2016 and 2021 of ?1.2 billion.
Gatwick Airport has committed to high capex over the next five years, but we feel reasonably confident that it will be able to maintain cash flows in line with our above expectations due to the pricing and cost flexibility allowed by its economic regulation, and its strong competitive and geographic position as a major airport in Greater London. While we expect dividends will correspond to the company's operating performance, we expect FFO to debt to remain above 11%. In our view, the company will maintain adequate liquidity, potentially through new funding through either capital markets or bank facilities.
CREDIT STRUCTURE
Covenants Following the updated regulatory framework that came into effect on April 1, 2014, GFL is only able to issue additional senior net debt of up to 70% of the transfer RAB, provided that it also continues to meet other financial covenants, including an interest coverage test. The transfer RAB is calculated by multiplying the average EBITDA of the preceding three years on each reporting date by a fixed multiple. The multiple, 11.1x, was determined by dividing the March 2014 regulatory RAB by the average EBITDA for the three years to March 2014. Total senior net debt comprises the class A notes, any senior debt issued by the borrower group having the same seniority as the senior notes, and accumulated accretion balances on the retail price index swaps, net of cash.
Financial Covenant PerformanceThe reported ratio of senior net debt to transfer RAB and the senior interest coverage ratio (ICR) have been in line with our projections following the CAA's change in Gatwick's regulation.
The senior regulatory asset ratio (RAR) was 0.59x in 2014/15 and 0.54x in 2015/16, respectively, against our base-case projections of 0.55x and 0.54x, respectively. These ratios are well within the trigger event ratio of 0.70x and event of default ratio of 0.85x. Gatwick's management projects that the senior RAR will be 0.53x in 2016/17 and 0.51x in 2017/18, respectively, after taking into account the new series 2016/1 notes, while we project ratios of 0.53x for each of the two years under our base case due to slightly lower projected transfer RAB. Senior RAR is defined as the ratio of senior debt (plus certain permitted financial indebtedness that is not subordinated to the senior debt), less amounts held in authorized investments or cash in any borrower account to RAB.
The senior ICR was 3.11x in 2014/15 and 3.51x in 2015/16, against our projected 3.16x for 2014/15 and 3.26x for 2015/16. These ratios provide significant headroom above the trigger event ratio of 1.50x and event of default ratio of 1.10x.
Interest, Currency, And Inflation RiskUnder its hedging policy, the issuer is required to have 75% of current debt fixed or linked to inflation for the current regulatory period. It also covenants to maintain a minimum of 50% of its debt either fixed or inflation linked in the following regulatory period. At the same time, the total notional hedged amounts must not exceed 102.5% of debt. The hedging ratio peaked at 102.1% in 2013/14 and has trended downward to 89.3% in 2015/16 as interest rate swaps with a total notional of ?32.3 million matured in 2014/15 and floating rate debt under bank facilities increased to ?230 million.
The security group may not bear currency risk in respect to any foreign currency denominated debt.
RECENT DEVELOPMENTS
Gatwick has been making the case that it and not Heathrow should be the site of a new runway to service southeast England. We published our views on the likely impact of the project on the underlying credit of each airport in "Shareholder Support Will Be Crucial In Boosting Runway Capacity At Heathrow Or Gatwick Airports," June 2, 2015. Although a decision is forthcoming, we have not included the impact of this potential expansion in our forecast as the construction would start after 2019/20. Apart from this, we do not expect material and or negative changes in Gatwick's credit ratios, although we highlight that restricted payments to shareholders are expected to remain approximately ?125 million per annum over the next three years.
We could lower our rating on the notes if the operating performance of Gatwick Airport is below our expectations in terms of EBITDA or if the leverage increases more than we anticipate, such that FFO to debt falls below 11% on a sustainable basis. We could also lower the rating if Gatwick Airport's liquidity falls below adequate due to higher dividends or capex not supported by sufficient available cash.
We could take a positive rating action on the notes if Gatwick Airport's FFO to debt increases above 13% on a sustainable basis due to consistently higher pax volumes or cost-cutting measures. However, we do not currently anticipate that this is likely to happen in the short term as passenger numbers are already high and capacity utilization is below 100% only in limited periods of the year. Moreover, we expect that the benefits of stronger operational performance would be utilized via shareholder distributions.
Комментарии